Higher Education’s Olive Garden Problem

02/05/2014

The Chronicle of Higher Education, February 5, 2014. Tuition resets—essentially, slashing the sticker price of tuition to the discounted price most students pay anyway—have become a popular public-relations stunt recently for a few colleges that are trying to reframe the conversation about the rising cost of higher ed and, most important, to help them fill their classroom seats and dorms.

While tuition resets might give those struggling institutions a one-year bump in enrollment, there is only so much they and hundreds of other high-priced, middle-market colleges can do to fight the forces of today’s macro economy. The reality is that the middle class is shrinking and top income earners are pulling away from everyone else on the pay scale.

A New York Times article this week noted that, in the last five years, spending by the top 5 percent of earners in the United States had risen 17 percent. Meanwhile, for the bottom 95 percent, it has risen just 1 percent.

“The effects of this phenomenon,” the Times reporter wrote, “are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.”

Let’s add colleges and universities to that list.

Moody’s Investors Service reports that net-tuition revenue—the cash colleges have left after giving out student aid—is essentially flat or declining at three-fourths of public colleges and three-fifths of private colleges. What’s more, a survey by The Chronicle last fall of more than 400 small private and regional public universities found that nearly half had missed their goals for either enrollment or net-tuition revenue.

Outside of higher education, businesses find the most success these days catering to either those at the top or those at the bottom of the income scale. Businesses that serve the middle market are floundering and shifting their strategies to offer lower prices to attract consumers.

As an example, the Times article cites Darden, the nation’s largest restaurant chain. Traffic at its lower-priced properties, Red Lobster and Olive Garden, where the average check is $16.50, has dropped every quarter but one since 2005. Meanwhile, at its upscale Capital Grille, where the typical check is $71, spending has risen an average of 5 percent each year for the last three.

In the higher-education sector, beyond community colleges and a handful of regional state colleges, there are few institutions even along the lines of Olive Garden that offer low-priced options for students. We have way too many Capital Grilles fighting for a shrinking share of wealthy and well-prepared 18-year-olds.

The problem is that, unlike most other sectors of the economy, the sticker price of colleges and their cost of doing business do not scale proportionally with quality. In other words, we have colleges that graduate nearly 100 percent of their students and colleges that graduate just 50 percent of their students, but both types essentially charge the same sticker price.

In the absence of the political will and the job growth that will strengthen the middle class, colleges and universities will need to adjust to that economic reality with new models that reduce their costs and, thus, prices for students.

What are those new models? Use the comments section below to submit your ideas, but on both the cost and price sides they might include greater use of technology that creates low-residency options; reductions in administration and staff; deeper alliances with other institutions; new degree pathways beyond just two and four years; a four-year guaranteed net price; and pricing plans in which students would pay less in tuition for their undergraduate education but then would pay annual subscription fees to the college through their 20s as they continued to take courses and use career services.

But what higher education shouldn’t do is adopt the strategy that many companies in corporate America have embraced in response to the downward trend in family income: move upscale by offering new products to capture even more dollars from affluent families.

Colleges have tried a similar strategy over the last decade by offering affluent students more and more financial aid as merit awards. The result of the higher sticker prices necessitated by bigger merit awards has been higher net prices for the poorest students (families who make $30,000 a year or less pay a net price of more than $15,000 a year at two-thirds of private institutions, according to the New America Foundation).

Not only are there fewer families around who can pay ever-larger college bills, but even those with the means are beginning to ask if the institution’s value is worth the ultimate price. For an increasing number of families, the answer to that value question is no.